When your investments grow in value, they may or may not be considered taxable income. How much tax you’ll owe on your investments depends on the type of investments and the type of account you hold them in.
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Are investments considered taxable income?
Money you earn from investments, through interest, dividends, or capital gains, is considered income. You may owe tax on the money you earn, if it is considered taxable income. This depends on the type of investment account you have, and the type of investments you hold.
If the income you earn from your investments or from savings interest is considered taxable income, you’ll receive a tax slip showing your earnings. That’s because you’ll need to declare it as income on your tax return.
Many sources of income in Canada are considered taxable income — in other words, income that you must claim on your annual tax return that may result in owing tax. Whether or not you will owe tax depends on many factors, such as what tax bracket you are in and how many deductions and refundable credits you can claim.
The most common sources of taxable income include:
- Employment income
- Employment insurance (EI)
- Interest and income earned on investments
- CPP benefits
- Old age security (OAS) pension payments
- Payments from annuities, RRIFs, and PRPPs
Learn more about which income sources should be reported as income on your tax return.
There are other sources of income that are considered non-taxable. This means you do not need to report them as income on your tax return. These include:
- Lottery winnings (unless it is considered income from employment)
- Most gifts and inheritances
- GST/HST credit and Canada Child Benefit (CCB)
- Most amounts received from a life insurance policy
However, if you earn interest or investment income on any of these amounts — for example, if you win the lottery and invest your winnings — then you would owe tax on the interest or income earned. Learn more about what income sources are taxable.
Keep all your tax slips from income-earning investments in a safe place so you’ll be ready to file your annual tax return.
What are tax-sheltered accounts?
If your investments are in a registered account, such as a Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP), it is tax-sheltered. This means your money grows tax-free while it is in the account, and it is not considered taxable income.
However, depending on the type of account, your money may be considered taxable income when you withdraw it from the account. For example, you pay tax when you withdraw money from your RRSP, but not from your TFSA. It’s important to check the rules for contributions and withdrawals for the account you select.
If your investments are in non-registered accounts, such as with an investment broker, there is no special tax-sheltered status. Your earnings would be considered taxable income in this case. Not all investment income is taxed in the same way or at the same rates. Some investment income attracts less tax than others. This creates opportunities to minimize your overall taxes by using certain types of accounts to hold specific asset classes.
There are many different types of registered accounts that can hold savings or investments. Learn more about the different kinds of investing accounts you could use.
How are your investments taxed?
When you invest outside of tax-sheltered accounts, you’re likely to owe taxes on:
- Interest-bearing investments – Any interest you earn on your investments or savings is taxed at your full marginal tax rate.
- Capital gains – If you sell an investment for more than you paid for it, this is called a capital gain. If you sell for less than you paid, you have a capital loss. If you apply your capital losses against your capital gains, then your capital gains will be reduced. You pay tax on 50% of your net capital gains. You can carry a net capital loss back for three years to offset net capital gains in those years and claim a refund. Or you can carry it forward indefinitely to offset future net capital gains. You can also apply your capital losses from previous years to offset new capital gains.
- Dividend-paying investments – Dividends are earned when a company distributes earnings to shareholders. Your dividend income will usually be reported to you on your tax slips including T3, T5, T4PS, or T5013.
- Foreign investments – If you receive income (interest, capital gains, or dividends) from investments outside of Canada, these must be reported on your Canadian tax return as the equivalent Canadian dollar value of the income. Foreign dividends do not qualify for the dividend tax credit. A withholding tax may be deducted from your foreign investment income. However, you may be able to claim a foreign tax credit to prevent double taxation. If you own specified foreign property costing more than $100,000, you must complete form T1135, Foreign Income Verification Statement, which can be filed electronically. Keep in mind that income from foreign investments in a TFSA will be subject to a withholding tax. Canada has a tax-exempt treaty with U.S. and other foreign countries for registered retirement plans such as RRSP, RRIF, LIRA — but not TFSA (or RESP).
How do you calculate the tax you’ll owe on investments that pay dividends?
If you want to calculate how much tax you’ll owe on your dividends, try these steps:
1. Add up your eligible dividends. These include most dividends from Canadian public companies and certain dividends from private companies. This must be identified by the corporation paying the dividends.
2. Multiply by 1.38. This number is your grossed-up dividends. (The amount added to the actual dividends is called the dividend gross up.)
3. Add your grossed-up dividends to your income for the year.
4. Calculate your tax owing on that grossed-up amount based on your tax rate.
5. Claim a federal dividend tax credit of approximately 15% of the grossed-up dividends.
6. Claim a provincial tax credit based on where you live.
Summary
Money you earn from investments, through interest, dividends, or capital gains, is considered income.
- How much tax you’ll owe depends on the type of investment and the type of account you hold it in.
- Taxable income must be reported on your tax return, including income earned on investments.
- Non-taxable income does not need to be reported as income. This includes most inheritances, lottery winnings, and the GST/HST credit.
- Investments held in registered, tax-sheltered accounts like TFSAs or RRSPs can grow tax-free while they are in the account. Â
- Non-registered accounts are not tax-sheltered. Your investment earnings from investments in these accounts are considered taxable income.
